Best Affirms Hanover Group’s Ratings

June 13, 2008

A.M. Best Co. has affirmed the financial strength rating (FSR) of ‘A-‘ (Excellent) and issuer credit ratings (ICR) of “a-” of Hanover Insurance Group Property and Casualty Companies of Worcester, Mass. and its members. Best also affirmed the ICR of “bbb-“and debt ratings of “bbb-” for senior debt and “bb” for capital securities of the publicly traded holding company, The Hanover Insurance Group, Inc. (THG). The outlook for the above ratings is positive.

In addition Best affirmed the FSR of ‘B+’ (Good) and ICR of “bbb-” of First Allmerica Financial Life Insurance Company (FAFLIC) with a stable outlook. A complete listing of the companies and ratings is given below.

“The ratings and outlook of Hanover reflect its excellent risk-adjusted capitalization, stemming from improved operating earnings and the elimination of dividends last paid to THG in 2002,” said Best. “In recent years, Hanover has sustained profitability and retained surplus through improved underwriting performance and favorable reserve development. The ratings further reflect improved financial leverage and the financial flexibility at THG since 2003.” Best also indicated that Hanover has benefited from “the disposal of THG’s variable life and annuity business.”

However, Best said “Hanover’s comparatively high underwriting leverage, primarily attributable to dividends paid to THG prior to 2002, which significantly reduced surplus should be considered as a partially offsetting factor. This in turn is countered by Hanover’s “leverage measures,” which have improved in recent years. Best said it “anticipates Hanover will produce favorable operating earnings,” and Best also believes “its underwriting leverage and capitalization will further improve.”

The ratings of FAFLIC primarily recognize its favorable levels of risk-adjusted capitalization, despite significant stockholder dividends in recent years, along with its continued affiliation with Hanover. While FAFLIC has experienced large pre-tax losses in each of the past two years as a result of a number of one-time events, net income has been positive due to tax benefits, which primarily are the result of FAFLIC’s utilization of tax credits under its consolidated tax sharing agreement with Hanover. Best said it “will be monitoring FAFLIC’s ability to reduce expenses and improve pre-tax operating results going forward.”

Best also said it has “revised the outlook to positive from stable and affirmed the FSR of ‘A-‘ (Excellent) and ICR of “a-” of Professionals Direct Insurance Company of Grand Rapids, Mich., which “was acquired by THG in 2007. The revised outlook reflects the enhancement the company receives from its new parent.”

Concurrently, Best affirmed the FSR of ‘A’ (Excellent) and ICR of “a” of Verlan Fire Insurance Company of Silver Spring, MD, also newly acquired by THG on March 14, 2008. The outlook for both ratings is stable.

Best summarized its rating actions as follows:
The FSR of ‘A-‘ (Excellent) and ICRs of “a-” have been affirmed for Hanover Insurance Group Property and Casualty Companies and its following members:
— Allmerica Financial Alliance Insurance Company
— Allmerica Financial Benefit Insurance Company
— Citizens Insurance Company of Americ
— Citizens Insurance Company of Ohio
— Citizens Insurance Company of the Midwest
— Citizens Insurance Company of Illinois
— The Hanover American Insurance Company
— The Hanover Insurance Company
— Hanover Lloyd’s Insurance Company
— The Hanover New Jersey Insurance Company
— Massachusetts Bay Insurance Company

The ICR of “bbb-” has been affirmed for The Hanover Insurance Group, Inc.

The following debt ratings have been affirmed:
The Hanover Insurance Group, Inc.—
— “bbb-” on $200 million 7.625 percent senior unsecured debentures, due 2025
AFC Capital Trust—
— “bb” on $309 million 8.207 percent trust preferred securities, due 2027

Source: A.M. Best –

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